Whats in Store for the Wayward Lender

Whats in Store for the Wayward Lender

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Under the prior version of Article 9, the consequences of a lender's failure to comply with the UCC depended largely on which state's law applied. Remedies varied significantly from jurisdiction to jurisdiction. Parties affected by any misconduct, other than the principal borrower, might not have standing to seek relief. Procedural differences also existed, particularly as they might relate to the burden of proof. Revised Article 9 changes much of this. This article will explore the rights and remedies of the borrower and other obligated parties in the event of a lender's failure to meet the requirements of Revised Article 9.

Section 9-625: Remedies for Secured Party's Failure to Comply with Article 9

The most significant change made by Revised Article 9 in this context relates to the scope of its coverage. Under prior law, remedies were available against a lender that failed to follow the applicable provisions relating to repossession or foreclosure. Section 9-625 offers injunctive relief or damages for the failure to comply with any provision of Revised Article 9. Where affirmative judicial intervention is appropriate, §9-625(a) specifies that injunctive relief is available from a court of appropriate jurisdiction. Section 9-625(b) subjects a disobeying lender to damages "in the amount of any loss caused by a failure to comply."

The ramifications of this expansion in scope may not have been contemplated by its authors. This will occur in the context of lender liability claims. After some of the more shocking lender liability verdicts were handed down in the mid-to-late 80s, a number of state legislatures enacted special "statute of frauds" provisions that applied to lending institutions and credit transactions.1 These provisions are designed to limit or exclude claims against lenders that are not based on written and signed documents.2 Literal enforcement of these statute of frauds laws in credit transactions resulted in a broad elimination of the more amorphous claims usually associated with lender liability litigation, such as breach of fiduciary duty, negligent representation and negligent interference with a contractual relationship or commercial advantage.3 Section 9-625 essentially countermands these statute of frauds provisions in any case involving noncompliance with any provision of Revised Article 9. Under the appropriate circumstances, this could revitalize lender liability claims that might otherwise be barred.

The remaining portions of §9-625 are not as controversial or potentially far-reaching, but significant nonetheless. Section 9-625(c) delineates the parties who have standing to seek damages. This includes the debtor, any obligor or any party holding a security interest or other lien in the collateral. If the collateral consists of consumer goods, recovery may be in an amount not less than the credit service charge plus 10 percent of the principal amount or "the time-price differential plus 10 percent of the cash price." This is designed as a minimum statutory recovery patterned on former §9-507(1).4

Under §9-625(d), a debtor whose deficiency has been eliminated under §9-626 may still recover damages for loss of any surplus. However, under this provision, where a deficiency has been eliminated or reduced under §9-626, the debtor cannot recover additional damages for the failure to comply with the provisions of Part 6 relating to collection, enforcement, disposition or acceptance. This provision is designed to eliminate the possibility of double recovery or other over compensation where reduction or elimination of a deficiency has occurred.5 However, this limitation does not apply to consumer transactions.

In the context of consumer transactions, §9-625(e) provides for statutory damages in the amount of $500, in addition to damages established under §9-625(b), in six specific situations:

  • Failure to comply with §9-208 [Additional Duties of Secured Party Having Control of Collateral];
  • Failure to comply with §9-209 [Duties of Secured Party if Account Debtor Has Been Notified of Assignment];
  • Filing a record that a person is not entitled to file under §9-509(a) [Persons Entitled to File a Record];
  • Failure to file or send a termination statement under §9-513(a) or (c) [Termination Statement];
  • Failure to comply with §9-616(b)(1) [Explanation of Calculation of Surplus or Deficiency], where part of a pattern or consistent with the practice of noncompliance;
  • Failure to comply with §9-616(b)(2).

Additional statutory damages are available for failure to comply with a request under §9-210 [Request for Accounting; Request Regarding List of Collateral or Statement of Account] pursuant to §9-625(f). Finally, §9-625(g) contains an added penalty limiting a lender's security interest to those items specified in a statement included in a request made under §9-210 "as against a person that is reasonably misled by the failure."

Section 9-626: Action in Which Deficiency or Surplus Is an Issue

The remedies prescribed in §9-626 are limited to the determination of a deficiency in the context of the "collection, enforcement, disposition or acceptance" of collateral.6 In any other situation involving noncompliance, the parties must look to §9-625. To a large degree, §9-626 is designed to clarify and make uniform a number of disparate rulings made under §9-507 of the prior code.7 Thus, under §9-626(a)(1), a debtor or secondary obligor has the ability to challenge compliance with respect to the recovery and disposition of collateral. Only after some aspect of the secured creditor's conduct has been challenged does there arise some burden to demonstrate compliance. Once its conduct is challenged, the secured creditor bears the burden of establishing compliance. This is characterized as the "rebuttable presumption rule."8 Where the secured creditor is unable to meet its burden of proof, the liability of the debtor or any secondary obligor for a deficiency will be limited according to a formula specified under §9-626(3). This is the greater of the actual proceeds from the disposition of the collateral or the amount that would have been realized had there been compliance.

Normally, the burden of proof rests with the party that is either asserting a claim or pleading an affirmative defense. This is clearly not the approach adopted in §9-626. It has been suggested that this reflects a desire to create an incentive on the part of the creditor to comply with the law or an assumption that evidence of compliance is more assessable to the secured party.9 The Official Comments shed no light on this subject. Nevertheless, the provision adds certainty to an area of the law that had been the subject of numerous judicial interpretations throughout the country.

Whatever clarity §9-626 brings to commercial transactions, it denies to consumer transactions. Under §9-626(b), it is the court, not the Code, that will determine what rules apply. As indicated by Official Comment 4, courts in many jurisdictions have taken three general approaches in dealing with noncompliance. These include the creation of an offset of damages against a deficiency, an absolute bar to recovery of a deficiency, or a rebuttable presumption that bars recovery of a deficiency unless the secured party establishes that compliance would have yielded an amount to satisfy the debt. Presumably, practitioners will look to whatever law was applied in the relevant state prior to enactment of Revised Article 9 to determine what rules will apply in consumer transactions.

Section 9-627: Determination of Whether Conduct Was Commercially Reasonable

Once a default has occurred in a transaction governed by Revised Article 9, the general requirements are that a secured party proceed with the disposition of its collateral in good faith, in a commercially reasonable manner and with reasonable notification.10 However, "commercially reasonable" is not a defined term. Section 9-627 provides some guidance in this regard. Section 9-627(a) embraces the rule contained in prior §9-507(2) to the effect that evidence that a better price could have been obtained is not itself indicative that the "collection, enforcement, disposition or acceptance" was not commercially reasonable.11 Section 9-627(b) establishes a series of safe harbors that offer a creditor conclusive proof of compliance. These include the availability of a recognized market, conformity with reasonable commercial practices established among dealers of like property, and approval in a judicial proceeding or by a recognized representative of creditors, such as a creditors' committee appointed pursuant to the Bankruptcy Code.

Section 9-628: Non-liability and Limitation of Liability of a Secured Party; Liability of Secondary Obligor

Section 9-628 is designed to limit liability in specific situations. Under §§9-628(a) and (b), where a secured party cannot identify or communicate with a debtor or obligor, liability cannot be established. Similarly, a secured party is relieved from liability associated with a consumer transaction where it reasonably believed that the transaction did not involve a consumer or consumer goods, where such belief is based on a representation made by a debtor or obligor. Sections 9-628(d) and (e) relate to the imposition of penalties for noncompliance in consumer transactions under §9-625(c)(2). Section 9-628(d) excludes liability for a violation of §9-616, which covers the duty to explain the calculation of any surplus or deficiency. Finally, §9-628(e) specifies that a secured party can be liable only once for a particular secured transaction.


1 See "Limiting Lender Liability: The Trend Toward Written Credit Agreement Statutes," 76 Minn. L. Rev. 295 (1991); "Stemming the Tide of Lender Liability: Judicial and Legislative Reactions," Den. U. L. Rev. 453 (1990). Return to article

2 See, e.g., Ala. Codes §9-9-2(7); alaska stat. §09.25.010(a)(13); Ariz. Rev. Stat. Ann. §44-101; Ark. Code Ann. §4-59-101, et seq.; Cal. Civ. Code §1624; Colo. Rev. Stat. §38-10-124; Conn. Gen. Stat. Ann. §52-550(a)(6); Del. Code Ann., Title 6, §2714; Fla. Stat. Ann. §687.0304; Ill. Ann. Stat. Ch. 17, para. 7101-7103; Ind. Code Ann. §32-2-1.5-4; Iowa Code Ann. §535.17; Ky. Rev. Stat. Ann. §371.010; Minn. Stat. §513.33; Miss. Code Ann. §75-12-5; N.D. Cent. Code §9-06-04; Ohio Rev. Code Ann. §1335.02; Ore. Rev. Stat. §41.580; S.D. Codified Laws §53-8-2; Tenn. Code Ann. §29-2-101(b); Tex. Rev. Civ. Stat., Bus. & Comm. Code §26.02; Utah Code Ann. §25-5-4; Va. Code Ann. §11-2.9; Wash. Rev. Code Ann., §19.36.110; W. Va. Code §55-1-1(g). Return to article

3 See, e.g., Anderson v. Pine S. Capital, 177 F. Supp. 2d 591 (W.D. Ky. 2001); Absolute Resource Corp. V. Hurst Trust, 76 F. Supp. 2d 723 (N.D. Tex. 1999); Consolidated Services Inc. v. KeyBank Nat'l. Ass'n., 29 F. Supp. 2d 942 (N.D. Ind. 1998); Univex Int'l. Inc. v. Orix Credit Alliance Inc., 902 P.2d 877 (Colo. App. 1995); Norwest Bank Lakewood v. GCC Partnership, 886 P.2d 299 (Colo. App. 1994). Return to article

4 Revised §9-625, Official Comment 4. Return to article

5 Revised §9-625, Official Comment 3. Return to article

6 Section 9-626, Official Comment 2. Return to article

7 Hawkland & Cohen, UCC Series, §9-626:4 (Rev. Art. 9), West. Return to article

8 Section 9-626, Official Comment 3. Return to article

9 See Zinnecker, "The Default Provisions of Revised Article 9," ABA (1999). Return to article

10 Section 9-607(c); §9-625, Official Comment 2. Return to article

11 Section 9-627, Official Comment 1. Return to article

Journal Date: 
Saturday, March 1, 2003